The net present value method | – is consistent with the goal of shareholder wealth maximization.- recognizes the time value of money.- uses all of a project’s cash flows. |

What is the internal rate of return’s assumption about how cash flows are reinvested? | They are reinvested at the project’s internal rate of return. |

We compute the profitability index of a capital budgeting proposal by | dividing the present value of the annual after tax cash flows by the cash investment in the project. |

Which of the following methods of evaluating investment projects can properly evaluate projects of unequal lives? | The equivalent annual annuity. |

All of the following are criticisms of the payback period criterion except: | It deals with accounting profits as opposed to cash flows. |

A significant disadvantage of the internal rate of return is that it: | -may have an unrealistic reinvestment assumption with respect to the discount rate used for re-investment of the cash flows.-Can result in multiple rates of return (more than one IRR). |

Under what condition would you not accept a project that has a positive net present value? | If the firm is limited in the capital it has available (capital rationing). |

The Net Present Value (or NPV) criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ________, and the Internal Rate of Return (or IRR) criteria assumes that expected future cash flows are reinvested at ________. | the firm’s appropriate discount rate, the internal rate of return |

A project would be acceptable if: | The net present value is positive. |

All of the following are sufficient indications to accept a project except (assume that there is no capital rationing constraint, and no consideration is given to payback as a decision tool): | The IRR of a mutually exclusive project exceeds the required rate of return. |

When reviewing the net present value profile for a project | the IRR will always be a point on the horizontal axis line where NPV = 0. |

The net present value always provides the correct decision provided that | capital rationing is not imposed. |

Which of the following statements about the internal rate of return (IRR) is true? | It fully considers the time value of money. |

A significant disadvantage of the payback period is that it: | Does not properly consider the time value of money. |

Mutually exclusive projects occur when: | A set of investment proposals perform essentially the same task. |

A significant advantage of the internal rate of return is that it: | Considers all of a project’s cash flows and their timing. |

Project A has an internal rate of return (IRR) of 15 percent. Project B has an IRR of 14 percent. Both projects have a required return of 12 percent. Which of the following statements is most correct? | Both projects have a positive net present value (NPV). |

Which of the following statements is most correct? | The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the IRR. |

The internal rate of return is: | The discount rate that equates the present value of the cash inflows with the present value of the cash outflows. |

Which of the following statements about the net present value is true? | It may be used to select among projects of different sizes. |

An independent project should be accepted if it: | … |

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